Chapter 1 | Legal Liability and Liability Insurance
Upon completion of this section, you should be able to:
- Describe the basis for legal liability.
- Identify the three type of torts.
- Describe the standards of care owed others.
- Briefly explain the reasons for the standardized insurance forms over nonstandard forms.
- Describe the Commercial Package Policy and identify its contents.
- Explain the coverages afforded under the Commercial General Liability Coverage Part.
WHAT IS LEGAL LIABILITY?
Legal liability is the liability imposed upon a person by law when he/she fails to perform obligations satisfactorily or injures someone. This action is termed a legal wrong. There are three broad classes of legal wrongs: tort, crime and breach of contract. Every legal wrong is an unjustified invasion of a legal right for which there must exist at least one legal remedy. A legal right is one which is recognized under law to exist. Legal remedies are the means by which violated rights are compensated.
Criminal law deals with wrongful acts against society itself. All of us, as citizens of our society, have a right to live in peace and good order. Some form of punishment such as imprisonment and/or monetary fines usually remedies an unlawful invasion of the social order.
Contract law supports the basis by which most of our economic transactions are regulated. Each party to a contract has a legal right to have every other contracting party fulfill its contractual promises. Legal wrongs in contract law occur when one part fails to perform as required. Legal wrongs in contractual dealings can also occur when one of the contracting parties was coerced into making non-voluntary contractual promises or when mistakes or misunderstandings relative to performance occur. The remedies for contractual wrongs include the judicial remedies of money damages, specific performance and rescission and restitution.
Generally speaking, neither criminal law nor contract law are a subject of liability insurance, while tort law is.
DEFINITION OF TORT
A tort is a civil wrong, an injury to one part caused by some act or omission of another party. It can arise from a violation of common or statutory law. It is a private wrong as opposed to a public wrong or crime. Therefore, it is remedied by suit brought in a civil court and not by a criminal proceeding.
Historical Development of Tort Law
Torts have their origin in common law which is based upon the principle of "stare decisis" (Latin for "the decision stands"). Current court decisions are based on past decisions to the extent that the circumstances are the same. Courts may reverse or modify existing decisions because they are no longer relevant or applicable. Over time, statute law has been introduced which has modified the common law past decisions. Whenever there is conflict between statute law and common law, statute law will always take precedence.
Types of Torts
Torts can be divided into three categories:
- Intentional - Intentional wrongs, such as assault, battery and slander, generally, are considered uninsurable. Intentional torts are closely akin to criminal actions because many are done with a specific purpose of invading another=s rights. For many intentional torts, the law will presume harm, which the victim need not prove, and requires less evidence than a person charged with criminal conduct.
- Absolute or Strict - Absolute or strict liability is the concept of activities that are regarded as so dangerous that anyone engaging in them, even though benefit is derived from those actions, must pay for any injury caused, despite having taken all possible precautions to avoid any mishap. An example of this liability is demonstrated by the use of explosives for blasting activities. This concept is also involved in the relationship between an employer and his/her employees. The employer is responsible for any injury suffered by his/her employees in the course of their employment. This is the foundation for Employers, Liability and Workers' Compensation Insurance.
- Negligence - Negligent acts or omissions are the most common type of torts. The imposition of liability may occur under common law or statutory law. Under common law, a person who trips and falls on a defective sidewalk can sue the person responsible for negligently allowing the defect to exist. On the other hand, a bartender who serves a person already under the influence of alcohol can be sued under statutory law if the person becomes injured through his drunkenness.
Elements of a Tort
There are four elements which must be satisfied in order to conclude a successful tort action:
- A right/duty relationship must exist. There must be a legal duty to conform to a standard of conduct for the protection of others against unreasonable risks.
- A breach of that duty. An invasion of the rights of others must occur. There must be a failure to conform to the standard of conduct.
- A casual relationship between the breach and the injury. Actual loss or injury to the interests of another must result and there is a reasonably close casual relationship between the conduct of the individual and the resulting injury.
- An absence of any affirmative justification for invading a protected right. Affirmative justifications deal with the concept of immunity or the victim's conduct, such as the assumption of risk when one attends a baseball game and is struck by a batted ball.
Each of these elements could warrant many pages of further discussion. However, our purpose is to understand the principles upon which liability insurance is based and not the many ramifications of the law.
STANDARD OF CONDUCT
Negligence is the failure to use at least the degree of care which a reasonable person, in the same position as the tortfeasor (or the party responsible for the act), would exercise to avoid exposing others to an unacceptably high probability that one of their legally protected rights will be invaded. The standard of care is relative to the circumstances and will vary accordingly. While the scope of duty is reasonable care, courts have defined differing degrees of care, which are reasonable in particular situations. Courts will hold the negligent tortfeasor responsible only for losses which the courts deem to be reasonably foreseeable by a reasonable man acting in prudent manner. In any event, entities are never privileged to act negligently towards one another. In determining liability, the courts may also examine the relative fault of the victim.
Specific Standards of Care
While the standards of care required may seem to be rather vague, there are some standards of care which have been specifically defined.
- Real Property - Standards of care for possessors of real property.
- Trespasser - One who enters premises without permission. To an adult trespasser, the duty is only slight care, although, one may not intentionally harm or set traps for undiscovered trespassers. An exception to this rule would be in case of the trespassing child. Courts in many jurisdictions adhere to the "attractive nuisance" doctrine which holds an occupier of land liable for conditions and objects which are both attractive and dangerous to a trespassing child. A swimming pool is a common example of an "attractive nuisance".
- Licensee - One who enters premises with permission, but for his/her own benefit. The standard of care required is reasonable care, which requires the removal of hazards known to the possessor or the posting of adequate warnings to these hazards.
- Invitee - One who enters premises with permission for the mutual benefit of the invitee and the professor. The standard of care owed is great care which requires a definite effort to discover and remove hazards and to post suitable warnings.
- Vicarious Liability - Concept which assigns responsibility to one person for the wrongful conduct of another.
- Master/servant - This is the liability of a "master" or employer for the acts of his/her "servants" or employees, provided these acts were committed during the course of employment. This is commonly identified in law as "respondent superior."
- Independent contractors - Usually, the conduct of an independent contractor when performing work for an owner/contractor is not controlled by the owner/contractor, and therefore, in common law, an owner/contractor has generally not been held to be liable vicariously for the acts of the independent contractor. The following three exceptions to this are especially noteworthy.
- When the owner/contractor supplies the independent contractor with plans, materials, equipment or supervision, and these items are faulty in any way or the independent contractor is not competent to handle them, the owner/contractor may be liable for any resulting injury.
- The second exception is the situation where the work to be done is inherently dangerous to others or will be dangerous unless particular precautions are taken. The excavation by a contractor which weakens the foundation of the adjoining building is an example.
- The fact that an independent contractor has been employed does not relieve the owner/contractor of the responsibility for maintaining his/her property in a safe condition even though the activities of the independent contractor may involve the use of this property. This is a requirement of the property owner beyond the scope of the independent contractor relationship.
- Voluntary assumption of liability - Occurs through contractual agreement where one party (the indemnitor) agrees to assume the liability of another (the indemnitee). In effect, the indemnitor contracts to hold the indemnitee harmless under certain circumstances. This voluntary assumption of liability ranges from the indemnitor agreeing to be solely responsible for his/her own acts or to the indemnitor agreeing to assume all liability, even that due to the sole negligence of the indemnitee.
The foregoing was intended only as an introduction to legal liability. The subject is much too broad and extensive to be fully covered in a brief introduction. It will, however, serve as the background for our study of the auditing of the general liability policy.
Please keep in mind, legal liability does vary state by state. Check your particular state laws.
PURPOSE OF LIABILITY INSURANCE
Liability insurance protects an insured against financial losses which arise from their obligations to others by transferring that financial loss to an insurance company.
TYPES OF LIABILITY INSURANCE
Liability can arise out of the ownership of property, from manufacturing or contracting operations, or from providing a professional service. The damages for which insureds may be liable may arise as a result of negligence which may be their own or the negligence of someone for whose actions they have responsibility. Damages could also come from a breach of contract or the assumption of the liability of others.
Since the possibilities of liability are numerous, the number and variety of liability insurance contracts are large. While it is widely known that coverage for automobile liability and liability under workers' compensation acts are treated separately, so too are there many different specific liability contracts available, including the following:
- Contractual Liability
- Druggist Liability
- Hospital Liability
- Liquor Liability
- Officers' & Directors' Liability
- Personal Injury Liability
- Owners' & Contractors Protective Liability
- Premises Liability
- Products-Completed Operations
- Professional Liability
- Storekeeper's Liability
While the list of contracts available to handle specific liability sources is lengthy, it should be remembered that these contracts and their coverage may be combined into one contract, such as the Commercial General Liability policy.
STANDARD AND NON-STANDARD FORMS
In addition to the many types of liability policies available to handle specific loss exposures, there are also several sources of insurance contracts. Some are standard while others are non-standard in nature.
Standard forms are sometimes referred to as bureau forms because their provisions are drafted by organizations such as the Insurance Services Office (ISO) and are recommended for use by insurers which are members or subscribers to the organization. They are standard in that the language of the policy provisions is the same regardless of insurer. A number of advantages are derived from standard forms and provisions by insurers, regulators and policyholders, including:
- Provide the benefits of court-tested language,
- Provide a meaningful basis for rate adjustments, since premiums and loss statistics are compiled using the same form,
- Less likely to create coverage gaps than a mix of standard and non-standard forms, and
- Greatly simplify the selling of insurance.
There are some instances, however, when standard forms may not be as suitable to a particular business. The coverage needs of the firm may not be typical. For instance, due to the nature of a product manufactured or process performed, a modification may be needed in the coverage. These non-standard or manuscript forms are typically found in the excess and surplus insurance lines.
INSURANCE SERVICES OFFICE
General liability is one of many lines of insurance within the scope of Insurance Services Office. ISO is a nationwide organization that functions as an advisory and rating organization much as the National Council on Compensation Insurance functions for Workers' Compensation.
ISO provides a wide range of services, including the following major functions: collect insurance statistics; classify and process statistical data; perform actuarial research; make advisory rates for affiliates; act as an agency for filing forms, rates and rules with state insurance departments; publish and distribute manuals, rules and rates; act in an advisory capacity to independent state rating bureaus; create and apply property rating schedules; and develop standard forms of policies and coverages.
Any insurer can become a member or subscriber for any line of insurance handled by ISO. Varying degrees of affiliation and purchase agreements are also available. ISO's professional staff is guided by a hierarchy of committees made up of their subscribers in developing new forms, coverages and services.
Most of the general liability policies that a premium auditor becomes involved with are the standard forms developed by ISO.
COMMERCIAL PACKAGE POLICY
For a number of years, Insurance Services Office (ISO) worked on a project that was meant to simplify and modernize the commercial lines policies. It became effective in many areas on January 1, 1986. This project brought about changes to standardize the format and content of policies. Most importantly, it met the insurance industry's request of being adaptable to current and future automation technology.
The package concept developed is known as the Commercial Package Policy (CPP). The CPP uses the same forms for monoline and multiline policies.
With the CPP program, all the forms and endorsements for a particular line of insurance make up the coverage part. If a policy provides only a single coverage part, it is a monoline policy. On the other hand, a policy with more than one coverage part is a Commercial Package Policy. The contents of a monoline policy differ from those of a package policy only in the number of coverage parts included.
CONTENTS OF THE COMMERCIAL PACKAGE POLICY
The contents of the Commercial Package Policy includes the following basic items:
1. Common Policy Conditions
- Cancellation conditions
- Changes conditions
- Examination of books and records condition
- Inspection and survey conditions
- Premium conditions
- Transfer rights conditions
2. Common Policy Declarations
- Policy number
- Named insured and address
- Policy period
- Producer name and address
- Coverage parts provided and respective premiums
- Total premiums and payment due at inception
- Listing of forms included
3. Line of Insurance Declaration Page(s)
- Limits of insurance
- Retroactive date (CGL)
- Form of business and type
- Classification, rate and premiums (CGL)
- Endorsements attached
4. Lines of Insurance Coverage Forms
- Commercial Property
- Commercial General Liability
- Inland Marine
- Boiler and Machinery
5. Line of Insurance General Conditions (except Auto, Boiler and Machinery and General Liability, which are included in the coverage forms).
COMMERCIAL GENERAL LIABILITY
The General Liability coverage part offered by ISO has gone through extensive changes, including the name of the policy. Effective 1/1/86, the policy became known as the Commercial General Liability (CGL) Coverage part, from the Comprehensive General Liability (CGL) policy. Same initials, different coverages.
The Commercial General Liability coverage part agrees to "pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." Common Package Policy (CPP) = Common Policy Conditions + Common Declarations + Coverage Parts
(1) Commercial Property (includes glass)
(2) Commercial General Liability
(4) Inland Marine
(5) Boiler & Machinery
The policy is designed to provide a broad base of liability protection for the insured. The main coverages provided under the CGL are:
1. Premises/Operations Liability
This coverage provides protection from exposures arising from the ownership, maintenance or use of property and from operations in progress.
A person or firm owning land or a building owes other certain common-law duties for the safety of others. Similarly, a party conducting a business operation has a duty to conduct the operations with reasonable care to avoid injuring others or damaging their property.
2. Products/Completed Operations Liability
This coverage provides protection from claims arising from the products hazard or completed operations hazard.
The products hazard occurs when the insured sells a product to others and bodily injury or property damage results from the use of that product by others. Coverage only applies if control of the product is relinquished by the insured and the accident happens away from the insured's premises.
The completed operations hazard, similarly, refers to bodily injury or property damage that occurs after the insured's operations have been completed. This hazard includes those situations in which the insured renders a service, such as a contractor. It generally would not include an insured in the business of manufacturing, selling or distributing goods. A servicing business may require both completed operations and products coverage if they both sell an item and install or service it for a customer.
3. Contractual Liability
Contractual liability arises out of the assumption of another person's or entity's legal responsibility.
The coverage is provided for all insured contracts which includes leases of premises, sidetrack agreements, easement agreements, elevator maintenance agreements and all contracts assuming tort liability.
4. Personal and Advertising Injury
Personal injury covers losses resulting from injury to others from libel, slander, false arrest, etc. Advertising liability refers to injuries resulting from advertising activities of a firm not in the advertising business.
5. Medical Payments
Medical Payments coverage provides coverage for medical expenses of persons injured on the insured's premises without regard to the insured's negligence.
6. Fire Damage Legal Liability
7. Broad Form Property Damage
8. Host Liquor Liability
9. Non-Owned Watercraft
10. Limited Worldwide Liability
11. Additional Persons Insured
12. Extended Bodily Injury
13. Automatic Coverage For Newly Acquired Organizations
14. Owner's and Contractor's Protective
15. Incidental Medical Malpractice
While the coverage part was designed to be broad in scope, it was not intended to provide insurance for:
These special areas of liability coverage require individual policies and underwriting, and therefore, are not included under the CGL coverage part.
The Commercial General Liability Coverage Part is designed for general use countrywide. In most cases, there is no need for modification. However, because of the complex needs of some insureds, modifications to these basic coverages must be made.
An endorsement is nothing more than a written modification of some portion of the policy. Some endorsements are used to broaden coverage while others are used to limit coverage. Still, other endorsements are used to meet specific state regulatory requirements.
The most commonly used endorsements are:
- Additional Insured - Owners, Lessees or Contractors
- Additional Insured - Vendors
- Amendment of Limits of Insurance
- Amendment of Limits of Insurance - Designated Project or Premises
- Exclusion - Explosion, Collapse and Underground Property Damage
- Exclusion - Intercompany Products Suits
- Exclusion of Specific Accidents(s), Products, Work or Location(s)
- Extended Reporting Periods
- Hired Auto and Non-Owned Auto Liability
MISCELLANEOUS LIABILITY COVERAGE
The miscellaneous liability coverages offered by ISO were revised to track with the 1986 revision to the Commercial General Liability policies. These coverages include: Owners' and Contractors Protective, Principal's Protective Liability, Railroad Protective Liability and Liquor Liability.
Owners' and Contractors' Protective Coverage Part
As a general rule, it may be said that a person is not only responsible for his/her own conduct but also for the conduct of others when they act in his/her behalf with his/her consent. This is another way of saying that an employer is responsible for the acts of his/her servants or a principal for the acts of his/her agent. There is a distinction between an employee and an independent contractor.
- The employee does his/her work under direct control of the person employing him/her and is responsible to that person for the manner in which services are performed.
- An independent contractor, however, renders services in the course of an independent occupation, in his/her own way and according to his/her own methods, and is responsible to the employer only for the results of the work, not for the means by which it is accomplished.
Because the employer does not have the right of supervision or control over the independent contractor or the independent contractor's employees, the general rule is that he/she is not responsible for the consequences of the independent contractor's acts.
This is the general rule. Courts, however, have held that an owner or contractor cannot be relieved of liability merely by the subcontracting of the work. In the following cases, the courts have held the contractor or owner responsible for injury or damage resulting from work performed for him/her by independent contractors:
- Where the work is unlawful in itself. An example would be the negligence of a contractor in suspending a sign over a street in violation of municipal ordinance.
- Where the injury is caused by violation of some non-legal duty which the general contractor is bound at his/her peril to discharge. This duty may arise by virtue of a statute such as when the railroad is given the right to construct its tracks across a public highway but at the same time is charged with the duty to protect the public. Responsibility may also be created by municipal ordinance such as a requirement that excavation in sidewalks shall be protected or that a roofed passageway be erected over a sidewalk after completion of the first story of a building in the course of construction.
- Where damage is a necessary consequence in executing the work in the manner provided in the contracts. In a case where a contract for laying a water pipe necessarily required excavation which rendered a highway dangerous to public travel, it has been held that the resulting damage is the responsibility of the contractor or principal for whom the work was done. An owner has also been held liable for injuries from the necessary opening by an independent contractor of a trap door in the sidewalk without warning and the boring a hole in the floor of an apartment causing plaster to fall from the ceiling below.
- Where the performance of the work is inherently dangerous. It has been held in some jurisdictions that blasting necessary to perform a job is inherently dangerous.
It should be pointed out that the independent contractor's responsibility is not transferred to the contractor or owner. Rather, they both are held individually responsible. The independent contractor's Premises/Operations insurance contract would protect him/her and protection from the contractor or owner would be provided by his/her contract providing Owners & Contractors Protective Coverage (OCP). The Premises/Operations coverage of the contractor or owner would not defend the subcontractor and the Premises/Operations coverage of the subcontractor would not defend the principal.
While coverage for independent contractor is automatically provided the general contractor under the CGL policy, a general contractor may require a subcontractor to purchase an Owner's and Contractor's Protective Policy on the general's behalf.
The basis of premium is the total cost of all work let or sublet in connection with specific project. The rates apply per $1,000 of Total Cost.
Principal's Protective Liability
The discussion above deals with the liability exposures of owners and contractors engaged in construction operations who may become liable for acts of independent contractors. Another type of liability exposure could arise from other types of independent contractors such as newspaper publishers. While principals generally are not held responsible for the acts committed by others, such as agents or independent contractors, there are enough exceptions to make it uncertain. There is a need for protection when there is control over another's actions.
Principal's Protective Liability insurance provides a two-part coverage. The first coverage part is designed to protect a principal in the event an independent contractor claims an injury while working for the principal. The second coverage part is intended to protect the principal against his or her liability from the injury or damage of an independent contractor while working for the principal.
Railroad Protective Liability
Railroads traditionally have looked for protection from liability claims from the public and from obligations involving the railroad's employees and its own rolling stock form contractors doing work which involves railroad right-of-way (highway or bridge construction are common examples). Normally, if this protection is not given, the railroads do not grant the easement rights necessary for the construction near the railroad to begin.
Railroad Protective Liability insurance can meet the railroad's needs. The insurance is obtained for or by the railroad but paid for by the contractor. The policy names the railroad as the named insured and it covers the railroad against bodily injury and property damage losses sustained by almost anyone at the designated work site. The insurance also provides first-party coverage for all physical damage to the rolling stock of railroads as well as their contracts and equipment.
The basis of premium is the total cost of all work let or sublet in connection with each specific project. The rates for this coverage apply per $1,000 of Total Cost.
The Commercial General Liability policy specifically excludes liquor liability for those organizations in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages. Firms not in a liquor-related business are covered for this exposure by the CGL policy while those in the liquor business must purchase a separate policy or have their Geneal Liability policy endorsed for liquor liability coverage.
The liability to a firm in a business involving alcoholic beverages stems from its selling, serving or giving such beverages:
- in violation of any statute, e.g., dram shop act,
- in violation of any ordinance or regulation, e.g., alcoholic beverage control laws,
- to a minor,
- to a person under the influence of alcohol, or
- in situations where such alcohol causes or contributes to the intoxication of any person
The basis of premium is Gross Sales, and rates are applied per $1,000 of Gross Sales.
COMMERCIAL LINES MANUAL
The Commercial Lines Manual (CLM) is the fundamental reference used in classifying and rating general liability policies. The CLM is published by the Insurance Services Office, Inc., a national advisory and rating organization licensed in all 50 states. It is comprised of five basic parts: common general rules, classification table, lines of insurance divisions, countrywide rate pages and state rate pages.
1. Common General Rules: These are common rules for all lines of insurance within the scope of the manual. ("CG" pages)
2. Classification Table: This section provides the classification terminology and code numbers for various operations. ("CS" pages)
3. Lines of Insurance Divisions:
Div. 1 - Auto
Div. 2 - Boiler & Mach.
Div. 3 - Crime
Div. 4 - Farm
Div. 5 - Fire
Div. 6 - Genl. Liability
Div. 7 - Glass
Div. 8 - Inland Marine
Div. 9 - Multiple Lines
4. Countrywide Rate Pages: Provide rating information that applies countrywide, rather than on a "per-state" basis.
5. State Rate Pages: Provide rates for each classification by defined territories.
LIABILITY INSURANCE FORMS
Common Policy Declarations
The Common Policy Declarations is used to form a part of the policy jacket of the Commercial Package Policy (CPP). The CPP is used when more than one coverage part is being provided. The overall limit of this form is to reduce the redundant information from the Coverage Declarations and to summarize coverages and package premiums.
The items covered by this form are:
1. Policy Number - The policy number is assigned by the company. The same number is used on all the coverage parts.
2. Names Insured - The insured named here is considered the "first named insured" which represents an important concept for accounts with multiple named insureds. The insurance company recognizes the first named insured as being:
- Responsible for the payment of premiums,
- Authorized to make changes in the policy terms with the company's consent,
- The only one authorized to cancel a policy, and
- The only one designated to receive notice of cancellation.
3. Policy Period - This shows the period of coverage of the policy, effective 12:01 a.m. on the first date shown.
4. Business Description - A brief description of the named insured's business operation is provided here.
5. Premium - This section indicates the total premium as well as the premiums for each of the coverage parts.
6. Forms - The company will indicate here, either by number or name, the endorsements and coverage parts included.
Common Policy Conditions
The Common Policy Conditions together with the Common Policy Declarations makes up the policy jacket for the Commercial Package Policy. Likewise, the intent of the form is to provide conditions that are common to all of the coverage parts, rather than repeating them on each coverage part. These conditions are a part of the Common General Liability policy and it is important for the premium auditor to understand them.
The items covered by this form are:
1. Cancellation - This section details the policyholder's and insurance company's rights and duties to cancel the policy. The "first named insured" may cancel the policy by merely sending a written notice to the insurer. The premium would be refunded on a short-rate penalty basis by the insurer. The insurer, on the other hand, has numerous additional requirements that must be met to cancel the policy. Most deal with properly notifying the insured. Premium returns would be on a straight pro-rata basis.
2. Changes - The only method for changing any of the policy coverages or provisions is with a written endorsement from the company.
3. Examination of Your Books and Records - This condition provides the insurer with the right to examine the insured's books of account as they may relate to the policy. The CGL Coverage Part V reinforces this right as well. With the right of the insurer to audit up to 3 years after the policy period, the insurer may revise an audit (of final earned premium) up to 3 years after the policy term.
4. Inspection and Survey - This section establishes the right to perform an inspection of the insured's facilities without an obligation to do so or for the inspection to warranty the safety of the facility.
5. Premiums - The first named insured is responsible for the payment of the premium.
7. Transfer of Your Rights and Duties Under This Policy - This policy may not be transferred or assigned to another party without the expressed written permission of the insurer.
Commercial General Liability Declarations
1. Policy Number, Named Insured and Policy Period - These items are the same as on the Common Policy Declaration.
2. Limits of Insurance - The limits of insurance limit the amount the insurer is obligated to pay on behalf of the insured. These limits are fixed by the number of insureds or the number of claims. The general aggregate is the total amount payable during the policy period, except for products/completed operations coverage and supplementary coverage. Internal sublimits apply separately to: products/completed operations, personal advertising injury, fire damage and medical expense.
3. Retroactive Date - This applies only to a claims-made policy. In a Commercial General Liability policy, the insured must choose between an occurrence policy and a claims-made policy. The occurrence version of the policy provides coverage for bodily injury and property damage that arises or occurs during the policy period. The occurrence trigger is the method that traditionally has been offered.
An example of an occurrence version of the policy: Assume a manufacturer was insured under a CGL policy by Company A in 1997 and by Company B during 1998 and 1999. If a loss was reported to the manufacturer in 1999 that had happened in 1997, the policy issued by Company A would respond since they had coverage when the accident occurred. The date of the loss is reported is not important under an occurrence policy.
On the other hand, a claims-made policy provides coverage for bodily injury and property damage only for which a claim is first made against the insured during the policy period. By using the example provided above, the policy issued by Company B would now respond because they had the coverage in 1999 when the claim was reported. The date on which the accident actually happened is not generally important under a claims-made policy.
The Retroactive Date defines after what date claims will be covered by the policy and is shown on the CGL Declaration Page. The option results in extending or limiting the coverage provided to the insured. The Retroactive Date has no effect on the auditing of the policy. The policy period remains unchanged regardless of the Retroactive Date used.
4. Form of Business - This indicates the insured's type of business entity, i.e., individual, partnership, joint venture, or other. This section also contains space for a brief summary of the insured's business operation and location.
5. Premiums - This section provides all the information necessary to determine the premium of the CGL coverage part including: classification descriptive wordings assigned to the insured's operations and classification code numbers, premium basis and rates. The "advance" premium shown is the company's estimate from the information available at the inception of the policy and subject to audit when the actual earned premium is determined.
6. Endorsements - The company will indicate the applicable endorsements used with the policy by name and/or form number.
- Additional Insured — Owners, Lessees or Contractors (Form A) — This endorsement permits the addition of an owner or contractor to a contractor's or subcontractor's policy as an additional insured.
- Additional Insured — Vendors — This endorsement affords coverage for persons or organizations, as additional insureds, who sell or distribute the named insured's products. The basis of premium is the Gross Sales of the vendor named on the endorsement.
- Amendment of Limits of Insurance — This amendment provides modified limits of insurance by replacing the limits shown on the declaration page. The premium auditor should split the developed exposures up to an after the effective date of this endorsement since different rates apply.
- Amendment of Limits of Insurance — Designated Project or Premises — Like the previous endorsement, this changes the limits of insurance but only for the specific project or premises named on the endorsement. The exposure developed on audit for the named project should be shown separately in the audit summary since different rates are applicable.
- Exclusions — Intercompany Products Suits — This endorsement eliminates the coverage provided by Section IV.7 of the CGL Coverage Part, Separation of Insureds. When this endorsement is added to a policy, the premium auditor should exclude the intercompany sales from the Gross Sales exposure for the Products/Completed Operations only. This endorsement does not affect Premises/Operations.
- Exclusion of Specific Accident(s), Products, Work or Location(s) — This endorsement excludes coverage for "bodily injury" or "property damage" arising out of the specific accident(s), products, work or location(s) described and applies to claims-made policies only.
When this endorsement is attached to a renewal claims-made policy, it requires that an extended reporting period endorsement be provided for the immediately preceding claims-made policy issued by the renewal carrier if the preceding policy provided products, work or location(s) being excluded on the renewal.
Exposures for those areas being excluded on the endorsement should also be excluded from the premium audit.
- Extended Reporting Periods for Specific Accident(s), Products, Work or Location —This endorsement provides for the extension of the reporting period on claims-made policies beyond the automatic 60-day extension provided by the CGL Coverage Part. This particular endorsement refers to specific accident(s), products, work or location(s). Other extended reporting endorsements may include an availability limitation or reduced time period. This endorsement in no way alters the policy period or changes the limits of insurance and, therefore, requires no change to the premium audit.
- Hired Auto and Non-Owned Auto Liability — This endorsement extends coverage for hired auto and non-owned auto liability which is also available on the Automobile Coverage Part.
Non-owned auto liability provides coverage for the exposure of employees using their own automobiles in the course of their employment. The basis of premium is the total number of employees of the named insured (total employees, not just those driving autos).
Hired autos are automobiles not owned by the named insured but which are loaned to or borrowed by the insured. This would not include common carriers or public autos under contract. The basis of premium is the cost of hire by state, excluding: charges for a driver when the vehicle is hired without a driver, and vehicles leased for longer than 12 months.